If you are one of millions of Americans struggling to pay your debts not only are you not alone in this tough economic time, but you do have options. There are several ways to get out of debt and back in the financial driver’s seat, but not all solutions are created equal. It is extremely important to carefully review all of the debt relief options available and this article covers the benefits and risks of filing for bankruptcy.
Types Of Debt
There are two main categories of debt: unsecured and secured. Secured debts are those that are tied to an asset or property as collateral, such as a mortgage or car loan. Secured debts give the lender repossession or foreclosure rights if you default on the loan. For this reason, resolving secured debts in bankruptcy are handled differently than unsecured debts.
Unsecured debts are those that are not tied to any property or asset as collateral, which also means the lender has little collection rights if you default on the loan. Unsecured debts are those such as credit cards, utility bills, medical bills, and some personal loans. These debts are easily managed in bankruptcy for the most part, unless they fall into a third category of debt: priority.
Priority debts can be either secured or unsecured, but their main categorization comes by who the lender is and why the debt is owed. Priority debts are accounts like back taxes owed to the IRS, student loan debts, or criminal restitution payments. The general rule is that these debts are not eligible for a debt discharge in bankruptcy, but have been approved to become part of a Chapter 13 repayment plan in some instances. The important thing to note about priority debts is that these creditors will be granted first access at any repayment funds through a Chapter 13 plan, and are likely to end up paid in full in most situations.
The way a debt is resolved in bankruptcy depends on the type of debt. As already discussed, priority debts get first crack at repayment through a Chapter 13 plan. It is fairly rare, and up to the discretion of the court, to have any priority debt eliminated through a Chapter 7 plan without any cost to the debtor.
Secured debts will be “discharged” only if the Chapter 13 repayment plan is completed in full as outlined by the court. Further, any portion of the remaining loan must be resumed in order for the debtor to keep the property. However, reaffirming debts can be complicated especially if the property could be considered exempt. This is where consulting with a bankruptcy lawyer comes in handy. Mortgages and car loans are often the most prized assets by any debtor and keeping them is usually top priority.
As for unsecured debts, they can be discharged through either a Chapter 7 or Chapter 13 bankruptcy. In a Chapter 7 filing, the debt will be satisfied through any eligible, nonexempt property liquidation if available. Otherwise, the creditors will be required to accept the debt as satisfied. Chapter 7 cases are highly specific to the income, assets and funds of the filer and no two cases will be managed the same. Some find that their debts are wiped out with little to no cost or loss of property.